Hubs of funding
In 2022, the usual suspects, Bengaluru, Delhi, and Mumbai emerged as the top startup hubs of the country in terms of deal count. However, a growing number of investors are starting to recognize the potential of Tier-II and Tier-III cities. These cities are poised to propel the burgeoning startup scene with their large pool of untapped talent, lower operating costs, and growing consumer markets, meanwhile addressing regional challenges. E-commerce, enterprisetech, and fintech emerged as the leading sectors in terms of funding deals over the past few years. It is anticipated that investments in D2C, clean mobility, health tech, agritech, and deeptech startups are anticipated to attract investments and grow rapidly in the coming years. India’s funding environment includes various sources ranging from angel investors and venture capitalists to crowdsourcing, and government projects.Funding winter
However, the startup ecosystem in India has been in the middle of a prolonged funding winter due to rising interest rates, inflation, monetary policy tightening, and fears of recession. Both the value and the number of funding deals suffered a setback in 2022, and experts believe the trend will likely continue in 2023. Rising commodity and energy prices increased operational costs and made it difficult for startups to generate a net positive cash flow. This, in turn, impacted investor sentiment. Foreign funding for Indian startups was particularly affected due to the global economic slowdown.Moreover, global investors are coming to terms with the fact that many Indian startups funded earlier were massively overvalued which is reflected in the slashing of valuations of startups like Byju’s and Swiggy. The lack of funds has also led to mergers and consolidations, mass layoffs, and scaling down of operations for many startups or even shutdowns. Despite central and state government’s initiatives, startups struggle to access capital at various stages of the business cycle, particularly the early-stage startups. A complex regulatory environment and compliance procedures are long-term roadblocks in the way of a startup’s trajectory. As foreign and NRI investors were brought under the ambit of angel tax under the 2023 Budget, Indian startups are anticipating more challenges in terms of future investments.
